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Wednesday, November 23, 2011

This concept will be better explained by using an example to compute the margin balance.

Let's start with a future's price of $200. The initial margin requirement is $10 and the maintenance margin is $6. The trader buy five contracts and deposits $50 (5 contacts * $10)Day 0 - The ending balance is $50.Day 1 - The price moves to $199.50. The adjustment that needs to be made is -$2.50 (200-199.5 * 5 contracts). The ending balance is now $47.50 ($50 - 2.50). Since this is above the maintained margin ($30) no funds need to be added to the account.Day 2 - The price moves down to $195. The loss, based on five contracts, is $22.50, so the account balance is $25. This is below the maintenance margin. The trader will receive a margin call and will need to deposit $25 into the account to bring it back up to the initial margin requirement.

This continues over the course of the trade until it is closed out. Please follow the following charts:

For a long position of five contracts, initial margin = $5, maintenance margin =$3

Day

Beginning Balance

Funds Deposited

Settlement Price

Future Price Change

Gain/Loss

Ending Balance

0

0

25

50

1

25

0

49.6

-0.4

-2

23

2

23

0

48

-1.6

-8

15

3

15

0

48.5

0.5

2.5

17.5

4

17.5

0

49.25

0.75

3.75

21.25

5

21.25

0

51

1.75

8.75

30

For a short position of five contracts, initial margin = $5, maintenance margin =$3

Day

Beginning Balance

Funds Deposited

Settlement Price

Future Price Change

Gain/Loss

Ending Balance

0

0

25

50

1

25

0

49.6

0.4

2

27

2

27

0

48

1.6

8

35

3

35

0

48.5

-0.5

-2.5

32.5

4

32.5

0

49.25

-0.75

-3.75

28.75

5

28.75

0

51

-1.75

-8.75

20

Learn more about what margin is, how margin calls work, how leverage can have advantages and why using margin can be risky in our Margin Trading tutorial.